This application discloses an invention that is related, generally and in various embodiments, to systems and methods for reducing a risk associated with a commodity supply contract.
A supplier of a commodity often enters into a long-term supply contract with a commodity consumer. In some supply contracts, the price of the commodity is fixed at a predetermined price for the entire term of the contract. In other supply contracts, there is a pricing schedule that stipulates a different predetermined price for each year of the contract (or some other applicable time period). Some consumers of the commodity prefer such arrangements because it allows them to budget their costs for the commodity for upcoming time periods (such as the upcoming fiscal year for the consumer). These arrangements, however, can be problematic if the market price of the commodity varies greatly from the predetermined price established by the supply contract. For example, if the market price increases substantially above the predetermined price, the supplier is exposed to a much greater risk. If the market price decreases substantially below the predetermined price, the consumer receives no benefit from the large drop in the market price.
To address such concerns, it is also known to include a predetermined price ceiling and/or a predetermined price floor in such contracts. The predetermined price ceiling may be fixed for the entire term of the contract, or may be different for each year of the contract. Similarly, the predetermined price floor may be fixed for the entire term of the contract, or may be different for each year of the contract. Both the price ceiling and the price floor serve to reduce the risks associated with variations between the market price of the commodity and the predetermined price established by the supply contract. However, because the price ceiling and the price floor are predetermined, they still fail to adequately protect the parties against risks resulting from events that have an extreme impact on the market prices of the commodity.